The Organization of Production and Economic Development

Abstract

A formalization of the Coase-Williamson-Cheung theory of the firm is used to examine the trade-off between the firm and the market as institutions for organizing production in a dynamic, general equilibrium model with increasing returns to labor specialization. The model considers the interaction of internal and external transaction costs and the gains to labor specialization in determining important aspects of the organization of production including the degree of labor specialization, the size and specialization of firms and the pattern of interfirm trade. Endogenous growth is driven by capital accumulation and the division of labor. The evolution of economic organization is characterized by increases in labor specialization, interfirm trade, firm specialization (vertical disintegration) and firm employment.development; endogenous growth; labor specialization; dynamic model; institutions; division of labor; growth; transactions costs; coordination; coordination costs; contract enforcement; organization; neoinstitutionalism; traditional economy; interpersonal exchange; theory of the firm; interpersonal exchange